EU monetary chief says Spain has not yet asked for bailout, confident on deficit targets

MADRID – Europe’s commissioner for monetary affairs, Olli Rehn, said Monday that Spain had as not yet asked for a bailout package and added that he was confident the recession-strapped country would meet its stated deficit reduction goals.

Spain is under pressure to ask for financial assistance from the eurozone if it wants the European Central Bank to act on an offer to buy its government bonds, lowering the country’s borrowing costs. But Madrid is hesitant to make the move, likely for fear of the policy conditions that might come attached and because of the political humiliation.

There was speculation that Spain might ask for the financial aid after last week passing a new €40 billion ($52 billion) austerity package that would have preempted the policy conditions the eurozone might demand.

But Rehn said the country has not made such a move.

“There is no request by Spain,” Rehn said at a press conference in Madrid after talks with Spanish Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos.

Spain’s financial markets were nevertheless buoyant on Monday. In mid-afternoon trading, the interest rate on Spain’s benchmark 10-year bonds edged down by 0.11 percentage points to 5. 87 per cent while Madrid’s Ibex index was up 0.7 per cent. The 10-year borrowing rate has fallen from 7 per cent highs in July on speculation Spain might eventually ask for help.

Some of those gains can be attributed to a positive reaction to the independent stress tests on Spain’s banking sector, unveiled after the market close on Friday.

The tests showed seven financial entities will need to shore up their capital by some €59.3 billion ($77 billion), considerably less than the €100 billion in rescue package granted some months ago by its eurozone partners. Spain has said it expects banks will ask for some €40 billion in rescue loans.

Meanwhile, Rehn said he expected the 17 euro nations to abide by June agreements that — in line with Spain’s request — would allow the permanent bailout fund, or ESM, to use the fund to rescue banks directly, sparing individual governments the financial costs.

Germany, Holland and Finland last week indicated they would like the eurozone rescue loans earmarked for Spain’s banks to remain on the Spanish government’s books rather than be offloaded to the European bailout fund.

Spain, in its second recession in three years with near 25 per cent unemployment, is battling to fulfil pledges to the EU to reduce its budget deficit to 6.3 per cent this year, 4.5 per cent next and year and 2.8 per cent in 2014.

On Saturday Finance Minister Cristobal Montoro admitted that aiding troubled banks means Spain’s deficit this year will be 7.4 per cent, not 6.3 per cent. He also revised last year’s deficit upward from 8.9 per cent to 9.4 per cent for the same reasons. He said that excluding the bank aid, Spain was on target.

Both Rehn and De Guindos said the bank aid was likely to be treated as one-off payments and not viewed by Europe as changing Spain’s structural deficit objectives.

Rehn said Spain’s “goals are within reach.”